Chapter-1: Investment Basic
Self Assessment Questions
1 Capital investment appraisal refers to:
a. Evaluating the costs and benefits of proposed investments in operating assets
b. Making sure that we have enough money to buy assets
c. Making sure that assets pay for themselves as soon as possible
d. Making sure that we have enough assets to operate
2 Which of the following will not be a relevant factor when using the payback method of
capital investment appraisal?
a. The cash flows generated by the asset up to the payback period
b. The cost of the asset
c. The total cash flows generated by the asset
d. The timing of the first cash inflow
3 A project would normally be undertaken if its net present value is:
a. Exactly the same as the NPV's of existing projects
b. Zero
c. Positive
d. Negative
4 Why the payback method is often considered inferior to discounted cash flow in capital
investment appraisal?
a. Because it does not take account of the time value of money
b. Because it only takes into account the future income of a project
c. Because it is more difficult to calculate
d. Because it does not calculate how long it will take to recoup the money invested
5 Which of the following is NOT an advantage of the accounting rate of return (ARR)
method of investment appraisal?
a. It takes into account the time value of money by allowing for depreciation in the
equation
b. It is easy to understand
c. There is comparability between the ARR and the ROCE ratio used in financial
accounting
d. The ratio takes account of the overall profit that is generated by the investment
6 The discount factor used to appraise capital investment decisions is a measure of:
a. The current high street interest rate
b. The current inflation rate
c. The opportunity cost of capital of all businesses in the same industry
d. The opportunity cost of capital of the business
7 Every financial market has the following characteristic:
a. It determines the level of interest rates.
b. It allows common stock to be traded.
c. It allows loans to be made.
d. It channels funds from lenders-savers to borrowers-spenders.
8 Financial markets have the basic function of
a. Bringing together people with funds to lend and people who want to
borrow funds.
b. Assuring that the swings in the business cycle are less pronounced.
c. Assuring that governments need never resort to printing money.
d. Both (a) and (b) of the above.
9 Which of the following can be described as involving direct finance?
a. A corporation’s stock is traded in an over-the-counter market.
b. People buy shares in a mutual fund.
c. A pension fund manager buys commercial paper in the secondary market.
d. None of these
10 Which of the following can be described as involving direct finance?
a. A corporation’s stock is traded in an over-the-counter market.
b. A corporation buys commercial paper issued by another corporation.
c. A pension fund manager buys commercial paper from the issuing corporation.
d. Both (b) and (c)
11 Which of the following can be described as involving indirect finance?
a. A corporation takes out loans from a bank.
b. People buy shares in a mutual fund.
c. A corporation buys commercial paper in a secondary market.
d. All of the these
12 Investment made in buying financial instruments such as new shares, bonds,
securities, etc. is considered as a Financial Investment.
(a) True
(b) False
13 Investment made in new plant and equipment, construction of public utilities like
schools, roads and railways, etc., is considered as ………….
a. Planned Investment
b. Real Investment
c. Unplanned Investment
d. None of these
14 ……………can also be called as Intended Investment because an investor while
making investment makes a concrete plan of his investment.
a. Planned Investment
b. Real Investment
c. Unplanned Investment
d. None of these
15 Gross Investment means the total amount of money spent for creation of new capital
assets like Plant and Machinery, Factory Building.
(a) True
(b) False
16 ………………involves of funds in various assets, such as stock, Bond, Real Estate,
Mortgages.
a. Stock investment
b. Financial investment
c. Cost investment
d. All of these
17 What Is Problem Gambling?
a. Gets in the way of work, school or other activities
b. Harms mental or physical health
c. Hurts financially
d. All of these
18 Investing is not having a claim on an entity that produces a product or service with
the goal of profit and the risk of loss.
(a) True
(b) False
19 Which of the following can be described as involving indirect finance?
a. A bank buys a U.S. Treasury bill from one of its depositors.
b. A corporation buys commercial paper issued by another corporation.
c. A pension fund manager buys commercial paper in the primary market.
d. Both (B) and (C) of the above.
20 Which of the following are short-term financial instruments?
a. A negotiable certificate of deposit
b. A banker’s acceptance
c. A U.S. Treasury bond
d. Both (a) and (b)
Answers for Self Assessment Questions
1. (a) 2.(a) 3.(c)
4.(a) 5.(a) 6.(d) 7.(d) 8.(a) 9.(d) 10.(d)
11.(d) 12.(a) 13.(b) 14.(a) 15.(a) 16.(b) 17.(d) 18.(b) 19.(a) 20.(d)
Chapter-2: Factors Favorable For Investment
Self Assessment Questions
1 Investment media are marketed by appealing to the needs of an individual’s risk level,
yield and product preferences.
(a) True
(b) False
2 Explore a wide array of fixed income instruments, and gain the skills to analyze and
value them, including:
a. Government bonds
b. Bonds subject to credit risk
c. Swaps
d. All of these
3 The decision to establish an investment plan is an important first step to accomplishing
your financial goals.
(a) True
(b) False
4 The portfolio is particularly relevant to:
a. Asset managers
b. Institutional and/or private investors
c. Futures, forwards and swaps
d. Both (a) and (b)
5 Which of the following financial intermediaries are depository institutions?
a. A savings and loan association
b. A commercial bank
c. A credit union
d. All of these
6 Which of the following is a contractual savings institution?
a. A life insurance company
b. A credit union
c. A savings and loan association
d. A mutual fund
7 Which of the following are not investment intermediaries?
a. A life insurance company
b. A pension fund
c. A mutual fund
d. Both (a) and (b)
8 Which of the following are investment intermediaries?
a. Finance companies
b. Mutual funds
c. Pension funds
d. Both (a) and (b)
9 Which one of the following could be considered as a disadvantage of using the payback
period method of investment appraisal?
a. Cash flows arising after the payback period is reached are ignored.
b. It is simple to calculate.
c. It is easy to understand.
d. For risky projects, it is relevant to compare which ones will repay the initial
investment in the quickest time.
10 The rate of return on the next best alternative investment is:
a. The fixed cost.
b. The sunk cost.
c. The opportunity cost.
d. All of these
11 An investment process helps keep investors focused and on track, and prevents the
investor from going off the rails emotionally when making investment decisions.
(a) True
(b) False
12 The following is not a reason for investing
a. To provide for retirement.
b. To fund higher levels of current consumption.
c. To fund higher levels of future consumption.
d. To fund children’s education needs.
13 The basic trade-offs in the investment process are
a. Between the anticipated rate of return for a given investment instrument and its
degree of risk.
b. Between understanding the nature of a particular investment and having the
opportunity to purchase it.
c. Between high returns available on single instruments and the
d. Diversification of instruments into a portfolio.
14 An investor can invest in financial assets by investing:
a. In cash, stocks and bonds
b. Indirectly, in real assets and financial assets.
c. In options, futures and through derivatives.
d. Directly, indirectly and through derivatives.
15 A portfolio manager with an active asset allocation decision philosophy will manage
a portfolio by
a. Tracking a well known market index
b. Stock picking using a top-down or bottom-up approach
c. Using market timing
d. Maintaining predetermined allocation with periodic rebalancing
16 A portfolio manager with a passive security selection decision philosophy will
manage a portfolio by
a. Tracking a well known market index
b. Stock picking using a top-down or bottom-up approach
c. Using market timing
d. Maintaining predetermined allocation with periodic rebalancing
17 The Economic Development of a country depends, inter alia, on the financial system.
(a) True
(b) False
18 The money market is not a wholesale debt market for low-risk, highly-liquid, shortterm instrument.
(a) True
(b) False
19 The ……………is designed to finance the long-term investments.
a. Money Market
b. Forex Market
c. Capital Market
d. All of these
20 The ………………deals with the multicurrency requirements, which are met by the
exchange of currencies.
a. Money Market
b. Forex Market
c. Capital Market
d. All of these
Answers for Self Assessment Questions
1. (a) 2.(d) 3.(a) 4.(d) 5.(d) 6.(a) 7.(d) 8.(d) 9.(a)
11.(a) 12.(b) 13.(a) 14.(d) 15.(c) 16.(a) 17.(a) 18.(b) 19.(c)
10.(c)
20.(b)
Chapter-3: Financial Institutions
Self Assessment Questions
1 The first development financial institution in India that has got merged with a bank is
a. IDBI
b. ICICI
c. IDFC
d. None of these
2 Which of the following NBFC converted itself into a commercial Bank?
a. Tata Finance
b. Reliance Capital Trust
c. Birla Mutual
d. None of these
3 The rate of which discounting the bills of first class banks is done by RBI is called
a. Bank Rate
b. Prime Lending Rate
c. Loan Rate
d. Discounting Rate
4 Which finance company has been given banking licence
a. Kotak Mahindra
b. Ashok Leyland & Finance
c. TVS Finance
d. Tata Finance
by RBI recently
5 The organization of the capital market in Indian presents a salient contrast to the
institutional structure in the industrially advanced countries of the west.
(a)True
(b) False
6 The main function of a new issue market can be divided into a triple services function:
a. Origination
b. Underwriting
c. Distribution
d. All of these
7 Consortium Advances refer to
a. Concurrent borrowings
b. Multiple financing
c. Joint Financing by more than one bank
d. Financing of consignment business
8 Zero interest bonds are not sold at a discount from their eventual maturity value and
bear no interest.
(a)True
(b) False
9 The regulatory bodies of the financial institutions in India are as follows:
a.
b.
c.
d.
Reserve Bank of India (RBI)
Securities and Exchange Board of India (SEBI)
Central Board of Direct Taxes (CBDT)
All of these
10 C.R.A. is banking parlance stands for
a. Credit Rating Association
b. Credit Rating Agency
c. Credit Risk Assessment
d. None of these
11 A market where new securities are bought and sold for the first time is known as a
__________ market.
a. Primary
b. Secondary
c. Tertiary
d. Capital
12 A market for existing (used) securities, such as the NYSE or AMEX, rather than new
issues is known as the __________ market.
a. Primary
b. Secondary
c. Tertiary
d. Capital.
13 A market for relatively long-term (greater than one year original maturity) financial
instruments (e.g., bonds and stocks) is known as the __________ market.
a. Primary
b. Secondary
c. Tertiary
d. Capital
14 Which of the following is not a method a firm can use to finance their long-term needs
externally?
a. Retained earnings.
b. Public issue.
c. Privileged subscription.
d. Private placement.
15 Which of the following is not a benefit of a well-run stock exchange?
a. Shareholders benefit from the availability of a speedy, cheap secondary market if
they wish to sell
b. Shares are always priced at a level which perfectly predicts the fortunes of the
companies
c. Society is assisted in the allocation of scarce capital to productive use
d. Firms are able to find funds and grow
16 Financial markets and institutions
a.
b.
c.
d.
Involve the movement of huge quantities of money.
Affect the profits of businesses.
Affect the types of goods and services produced in an economy.
All of these
17 The stock market is important because
a. It is where interest rates are determined.
b. It is the most widely followed financial market in the united states.
c. It is where foreign exchange rates are determined.
d. All of these
18 Stock prices since the 1950s have been
a. Relatively stable, trending upward at a steady pace.
b. Relatively stable, trending downward at a moderate rate.
c. Extremely volatile.
d. Unstable, trending downward at a moderate rate.
19 A rising stock market index due to higher share prices
a. Increases people’s wealth and as a result may increase their willingness to spend.
b. Increases the amount of funds that business firms can raise by selling newly
issued stock.
c. Decreases the amount of funds that business firms can raise by selling newly
issued stock.
d. Both (A) and (B)
20 The industrial securities market in India consists of new issue market and stock
exchange.
(a)True
(b) False
Answers for Self Assessment Questions
1. (b) 2.(b) 3.(a) 4.(a) 5.(a) 6.(d) 7.(c)
8.(b)
11.(a) 12.(b) 13.(d) 14.(a) 15.(b) 16.(d) 17.(b) 18.(c)
9.(d) 10.(c)
19.(d) 20.(a)
Chapter-4: Role of the New Issue Market
Self Assessment Questions
1 The various methods of floating of securities in the new issue market are as:
a. Public issues
b. Offer for sale
c. Placement
d. All of these
2 …………………consists in outright sale of securities through the intermediary of issue
houses or brokers.
a. Public Issues
b. Offer of sale
c. Right issues
d. None of these
3 The stock market occupies a pivotal position in the ……………
a. Economic system
b. Stock system
c. Financial system
d. All of these
4 Which of the following markets is sometimes organized as an over-the-counter market?
a. The stock market
b. The bond market
c. The federal funds market
d. all of these
5 The presence of _____ in financial markets leads to adverse selection and moral hazard
problems that interfere with the efficient functioning of financial markets.
a. No collateralized risk
b. Free-riding
c. Asymmetric information
d. Costly state verification
6 Supply and demand theories help illustrate the market forces that influence the trading
mechanism in the stock exchange.
(a)True
(b) False
7 ………….is the most commonly used type of underwriting contract.
a. Best Efforts
b. Firm commitment
c. Standby
d. All or None
8 ……………….underwriting allows the issuing corporation to contract for the sale of all
shares.
a. Best Efforts
b. Firm commitment
c. Standby
d. All or None
9 When does a state have a negative balance of trade?
a. When it pursues a policy of autarky
b. When its exports are greater than its imports
c. When its tariffs are greater than its revenues
d. When its imports are greater than its exports
10 Trade in services includes which of the following?
a. Insurance
b. Weapons
c. Food
d. Textiles
11 ________ emphasizes conflicting state interests in economic exchanges.
a. Socialism
b. Liberalism
c. Mercantilism
d. Marxism
12 In a centrally planned economy,
a. Supply and demand are key indicators of prices and production levels.
b. Individuals are free to pursue comparative advantage.
c. Business leaders set production quotas and report them to government, which
holds them accountable.
d. Political authorities set prices.
13 Liquidity and marketability of securities:
a. Safety of funds
b. Supply of long term funds
c. Flow of capital to profitable ventures
d. All of these
14 Stock exchanges provide buying and selling of securities.
(a)True
(b) False
15 Which are Types of Speculators?
a. Bull
b. Bear
c. Both (a) and (b)
d. None of these
16 ………..are very optimistic of the rise in prices of securities.
a. Bear
b. Bulls
c. Stag
d. All of these
17 A ………….neither buys nor sells but applies for subscription to the new issues
expecting that he can sell them at a premium.
a. Bear
b. Bulls
c. Stag
d. All of these
18 …………are very pessimistic and always they expect a fall in the prices of securities in
future.
a. Bears
b. Bulls
c. Stag
d. All of these
19 Speculative transactions are:
a. Option dealing
b. Wash sales
c. Arbitrage
d. All of these
20 The National Stock Exchange of India (NSEI) was established in 1994 to encourage
stock exchange reform through system modernization and competition.
(a)True
(b) False
Answers for Self Assessment Questions
1. (d) 2.(b) 3.(c)
4.(d) 5.(c)
6.(a) 7.(b)
11.(c) 12.(d) 13.(d) 14.(a) 15.(c) 16.(b) 17.(c)
8.(d) 9.(d) 10.(a)
18.(a) 19.(d) 20.(a)
Chapter-5: Legal Control of Stock Exchanges
Self Assessment Questions
1 What is a legal agreement, also called the deed of trust, between the corporation issuing
bonds and the bondholders that establish the terms of the bond issue?
a. Indenture.
b. Debenture.
c. Bond.
d. Bond trustee.
2 Who or what is a person or institution designated by a bond issuer as the official
representative of the bondholders?
a. Indenture.
b. Debenture.
c. Bond.
d. Bond trustee.
3 __________ is a long-term, unsecured debt instrument with a lower claim on assets and
income than other classes of debt; while a/(an) __________ bond issue is secured by the
issuer's property.
a. A subordinated debenture; mortgage
b. A debenture; subordinated debenture
c. A junk bond; income
d. An income bond; junk
4 All of the following are true regarding bonds except __________.
a. The amount borrowed is the principal, also referred to as the face value,
maturity value, and par value
b. The corporation must repay the bond principal at maturity; it is a
contractual obligation, which is legally binding
c. Bondholders are creditors lending their money to earn interest
d. Bondholders are owners of the corporation
5 All of the following are true regarding the selling price of bonds except __________.
a. The current selling price is the present value of the future cash outflows
of the bond payable
b. A bond issued at a price above its maturity value is sold at a premium
c. A bond with a contract interest rate of 7% sold when the market interest
rate is 9% will sell at a premium
d. A bond price quoted at 97 indicates the bond is selling at a discount
6 All of the following statements are true regarding bonds issued at a discount except
__________.
a. The entry to pay off the bond at maturity is a debit to Bond Payable and a
credit to Cash for the same amount
b. Interest expense will always be greater than the interest payments
c. At maturity, the bond discount will be totally amortized and report a
zero amount
d. The carrying value will decrease over the life of the bond payable
7 Advantages of financing operations by issuing bonds include:
a. Bond interest expense is not tax-deductible, and therefore may result in
higher earnings per share.
b. A bond creates no liabilities or interest expense.
c. Bonds carry a lower financial risk than shares to the issuing corporation
d. Bonds do not dilute share ownership or control of the organization.
8 Moderately conservative investors are willing to take on some amount of risk but
typically seek to balance this risk with assets that preserve the principal investment.
(a)True
(b) False
9 If the intrinsic value of a stock is greater than its market value, which of the following is
a reasonable conclusion?
a. The stock has a low level of risk.
b. The stock offers a high dividend payout ratio.
c. The market is undervaluing the stock.
d. The market is overvaluing the stock.
10 When the market's required rate of return for a particular bond is much less than its
coupon rate, the bond is selling at:
a. A premium.
b. A discount.
c. Cannot be determined without more information.
d. Face value.
11 If an investor may have to sell a bond prior to maturity and interest rates have risen
since the bond was purchased, the investor is exposed to
a. The coupon effect.
b. Interest rate risk.
c. Perpetuity.
d. An indefinite maturity.
12 Interest rates and bond prices
a. Move in the same direction.
b. Move in opposite directions.
c. Sometimes move in the same direction, sometimes in opposite directions.
d. Have no relationship with each other (i.e., they are independent).
13 Which of the following information cannot be found in a bond’s indenture?
a. The coupon rate.
b. The maturity of the bond.
c. The price of the bond.
d. None of these.
14 The bond contract that states the lender’s rights and privileges and the borrower’s
obligations is called the
a.
b.
c.
d.
Bond syndicate.
Restrictive covenant.
Bond covenant.
Bond indenture
15 A corporate bond is a bond issue by a corporation.
(a)True
(b) False
16 The legal document that states the rights and obligations of bondholders and issuers is
known as a Bond Indenture.
(a)True
(b) False
17 Interest rates are not determined in the bond markets.
(a)True
(b) False
18 A bond is a financial instrument that is issued by a company or government to
investors.
(a)True
(b) False
19 The ………….date is the date in the future on which the investor’s principal will be
repaid.
a. Coupon
b. Face Value
c. Maturity
d. All of these
20 Bonds can be classified based on:
a. Coupon Rate
b. Term to Maturity
c. Municipal bonds
d. All of these
Answers for Self Assessment Questions
1. (a) 2.(d) 3.(a) 4.(d) 5.(c)
6.(d) 7.(d) 8.(a) 9.(c)
11.(b) 12.(b) 13.(c) 14.(d) 15.(a) 16.(a) 17.(b) 18.(a) 19.(c)
10.(a)
20.(d)
Chapter-6: Analysis of Preference Shares
Self Assessment Questions
1 Shares or stock options in a company permit the buyer the possession rights in a
company.
(a)True
(b) False
2 Who are the ultimate owners of a limited liability company?
a. The ordinary shareholders and the participating preference shareholders
b. The ordinary shareholders
c. The ordinary shareholders and the cumulative preference shareholders
d. The cumulative preference shareholders
3 A company issued a number of '6% cumulative preference shares of £1 each' during the
current year. How would these be classified on the balance sheet of the company at the
end of its current financial year?
a. Total equity
b. Current liability
c. Equity
d. Non-current liability
4 Which of these are statutory reserves of a company?
a. Share premium.
b. Retained earnings.
c. Capital redemption reserve.
d. Both(a) and (c)
5 Which of the following does not form part of a company's equity?
a. Ordinary shares
b. Preference shares
c. Voting shares
d. Equity shares
6 What is the equity attributable to ordinary shareholders equal to?
a. The total assets
b. The total assets less the current liabilities
c. The total assets less the non-current liabilities
d. None of these
7 Which of the following is a correct statement about shareholders' equity?
a. It equals cash at the bank
b. It includes issued share capital and retained earnings
c. It includes share capital, reserves, retained earnings and non-current liabilities
d. It first appears in the income statement
8 Which of the following methods of issuing new equity will incur the lowest level of
issue costs?
a. An offer for sale by tender.
b. An intermediary’s offer.
c. A placing.
d. An offer for sale at fixed price.
.
9 Which of the following best describes a cumulative preference share?
a. It has the right to convert into ordinary shares in the future..
b. It entitles the shareholder to a fixed rate of dividend.
c. It entitles the shareholder to a share of residual profits.
d. It carries forward the right to unpaid preference dividends from one year to the
next
10 Which of the following statements about equity finance is not true?
a. Equity investors expect the greatest return because they bear the highest level of
risk.
b. Unlike ordinary dividends, preference dividends are tax efficient.
c. The theoretical ex right price is a weighted average of the cum rights price and
the rights issue price.
d. Equity finance usually gives ownership rights to its holders.
11 In what way do preference shares resemble ordinary equity shares?
a. Preference shares have voting rights.
b. Dividend payments are always flexible.
c. Preference shares have the same risk as equity shares.
d. Generally speaking, preference shares are irredeemable.
12 SDLs stands for
a. State Development Loans
b. State Development Line
c. Shareholder Development Loans
d. shares Development Loans
13 Buyback of Government securities is a process whereby the Government of India and
State Governments buy back their existing securities from the holders.
(a)True
(b) False
14 NDS stands for
a. National Dealing System
b. Negotiated Dealing System
c. Both (a) and (b)
d. None of these
15 Reinsurance' refers to the practice by insurance companies of:
a. Buying insurance from another firm
b. Insuring the same risk twice
c. Issuing new policies
d. Renewing existing policies
16 By taking out insurance cover an individual:
a. Reduces the cost of an accident
b. Converts the possibility of large loss to certainty of a small one
c. Reduces the certainty of major loss
d. Transfers the risk to someone else
17 Life insurance is not a contract of indemnity because sum assured is always payable
and only the time period of payment is uncertain.
(a)True
(b) False
18 A flexible premium life insurance policy that cannot structure to meet our individual
needs.
(a)True
(b) False
19 India is one of the fastest growing economies in the world and various economic
estimates and research reports peg India’s growth around 6%-7% annually.
(a)True
(b) False
20 Which one is not features of equity shares:
a. Owned Capital
b. Fixed Value or Nominal Value
c. Distinctive Number
d. Capital budgeting
Answers for Self Assessment Questions
1. (a) 2.(b) 3.(d) 4.(d) 5.(b) 6.(d) 7.(b) 8.(c)
9.(d) 10.(b)
11.(d) 12.(a) 13.(a) 14.(b) 15.(a) 16.(b) 17.(a) 18.(b) 19.(a) 20.(d)
Chapter-7: Investment in Units
Self Assessment Questions
1 Which types of investment UNITs
a. Equity UITs
b. Strategy Trusts
c. Both (a) and (b)
d. None of these
2 Which one are not Features and Characteristics
a. Professionally Selected Portfolios
b. Diversification
c. Daily Liquidity
d. Fixed-income UITs
3 The UITs are actively managed, and so securities in the trust will not be sold to take
advantage of changing market circumstances.
(a)True
(b) False
4 The UIT prospectus includes a fee board that lists the charges our pay.
(a)True
(b) False
5 Investment decisions depend on:
a. The cost of investment.
b. The present value of expected profit from investment.
c. The real interest rate.
d. All of. these
6 The user cost of capital:
a. Is defined as the sum of real interest rate and the depreciation rate
b. Is also known as the rental cost
c. Is also known as the shadow cost
d. All of these
7 Firms should invest more when:
a. The price of an additional unit of capital exceeds the price of its stock.
b. The price of its stock is less than real interest rate.
c. The Tobin’s q is less than 1.
d. The price of an additional unit of capital is less than the price of its stock.
8 Investment is more volatile than consumption.
a. This statement is always true.
b. This statement is always false.
c. This statement is sometimes true and sometimes false.
d. This statement is only true during recessions.
9 Which two of the following are likely to increase investment expenditure?
a.
b.
c.
d.
A rise in the rate of interest
A fall in the rate of interest
More favorable business expectations and less uncertainty
Both (b) and (c)
10 Which two of the following are likely to reduce investment expenditure?
a. A rise in the rate of interest
b. Both (a) and (d)
c. More favorable business expectations and less uncertainty
d. Less favorable business expectations and more uncertainty
11 Which two of the following would shift the ‘Marginal Efficiency of Investment’ (MEI)
schedule to the right?
a. Both (b) and(d)
b. A rise in expected annual returns on projects
c. A rise in the supply price of projects
d. A fall in the supply price of projects
12 Gross investments is seen as depending on last year’s level of output and last year’s
capital stock.
a. Stop-go’ Public Policies
b. Marginal Efficiency of Investment (MEI)
c. Levels of Profitability
d. Capital Stock Adjustment Model
13 Identifies the rate of discount which equates the present value of the expected returns
on a project to the initial capital outlay required to fund that project.
a. Marginal Efficiency of Investment (MEI)
b. Nature of the Financial System
c. Accelerator Theory
d. Levels of Profitability
14 Greater availability of the firm’s own internally generated funds is seen as reducing
the cost and lowering the risk of investment.
a. Accelerator Theory
b. Levels of Profitability
c. Marginal Efficiency of Investment (MEI)
d. Capital Stock Adjustment Model
15 Gross investments over-estimate the change in the stock of capital or inventories in the
year since it does not take into account the depreciation of those assets.
(a)True
(b) False
16 Bond prices are negatively correlated to interest rates, so as general market interest
rates rise, the price of a bond could decrease.
(a)True
(b) False
17 Investments in municipal securities are not subject to the creditworthiness of their
issuers.
(a)True
(b) False
18. Which of the following is not a method of pricing raw material issues from stock?
a. Standard costing.
b. Unit cost.
c. Marginal cost.
d. Continuous weighted average.
19 Identify the two principal kinds of Real Estate Investment Trusts (REITs).
a. Investment trusts and Mortgage trusts
b. Equity trusts and Institutional trusts
c. Construction trusts and Investment trusts
d. Equity trusts and Mortgage trusts
20 Which of the following observations concerning a unit investment trust is true?
a. Characterized by active portfolio management
b. Primarily invests in distressed assets
c. Higher management fees
d. Fixed portfolio composition
Answers for Self Assessment Questions
1. (c) 2.(d) 3.(b) 4.(a) 5.(d) 6.(d) 7.(d) 8.(a)
11.(a) 12.(d) 13.(a) 14.(b) 15.(a) 16.(a) 17.(b) 18.(c)
9.(d) 10.(b)
19.(d) 20.(d)
Chapter-8: Tax Benefits
Self Assessment Questions
1 Provident fund is a fund that provides benefits to the employees of a company who are
members of the fund, upon termination of their employment.
(a)True
(b) False
2 The average tax rate is equal to the __________.
a. Total tax liability divided by taxable income
b. Rate that will be paid on the next dollar of taxable income
c. Median marginal tax rate
d. Percentage increase in taxable income from the previous period
3 What mechanism ensures that large firms who benefit from tax laws pay some
minimum amount of tax?
a. Annual minimum tax.
b. Alternative minimum tax.
c. Minimum tax law.
d. Corpulent minimum tax.
4 If a mutual fund holds a substantial amount of Treasury bills, this is probably a Taxexempt fund.
a. Conservative bond fund.
b. Income fund
c. Money market mutual fund.
5 Which one of the following statements regarding open-end mutual funds is false?
a. Both (a) and (b)
b. The funds redeem shares at net asset value.
a. The funds offer investors professional management.
b. The funds offer investors a guaranteed rate of return.
6 Which one of the following statements regarding closed-end mutual funds is false?
a. The funds always trade at a discount from NAV.
b. The funds redeem shares at their net asset value.
c. The funds offer investors diversification.
d. Both (a) and (b)
7 Which of the following is true regarding value funds and growth funds?
a. Value funds seek stocks that are cheap by fundamental standards while growth
funds seek stocks with high current earnings.
b. Growth funds typically outperform value funds.
c. Value funds and growth funds tend to perform well at different times.
d. All of the above are true.
8 The PF regulations will be relevant to total salary irrespective of whether the salary is
remunerated in India or outside India, split payroll, or multiple country sources.
(a)True
(b) False
9 SSAs stand for
a. Source Security Agreements
b. Social Security Agreements
c. Sound Security Agreements
d. None of these
10 Which two of the following would shift the Key Features of SSAs
a. Detachment
b. Exportability of Pension
c. Payment of benefits
d. Both (a) and (b)
11 The benefits of Investing in Post Office Schemes
a. No Tax Deduction at Source (TDS).
b. Nomination facility is available.
c. Nomination can be changed at any time
d. All of these
12 The Indian postal sector has started numerous Post Office saving schemes like:
a. Post Office Time Deposits
b. Deposit Scheme for Retiring Government Employees
c. Post Office Monthly Income Scheme
d. All of these
13 are concerned with the maximization of a firm's earnings after taxes.
a. Shareholder wealth maximization
b. Profit maximization
c. Stakeholder maximization
d. EPS maximization
14 ………….are the most concentrated store of value that exists.
a. Stamps Investment
b. Diamonds Investment
c. Antiques Investment
d. None of these
15 Which of the following countries is in the investment-driven stage of national
development?
a. South Korea.
b. The United States.
c. Great Britain.
d. All of the above
16 It is important to understand the ……….of gold and silver when investing in precious
metals.
a. Price
b. Purity
c. Market
d. All of these
17 The …………..of gold and silver fluctuates constantly.
a. Price
b. Purity
c. Market
d. All of these
18 Investing in gold and silver tends to increase during times of economic uncertainty.
(a)True
(b) False
19 NSSF stands for
a. National simple saving Fund
b. National Small Savings Fund
c. National small standard Fund
d. All of these
20 PPF stands for
a. Public provident fund
b. Post provident fund
c. Private provident fund
d. None of these
Answers for Self Assessment Questions
1. (a) 2.(a) 3.(b) 4.(c)
5.(a) 6.(d) 7.(c)
8.(a) 9.(b) 10.(d)
11.(d) 12.(d) 13.(b) 14.(b) 15.(a) 16.(b) 17.(a) 18.(a) 19.(b) 20.(a)
Chapter-9: Investment Avenues
Self Assessment Questions
1 Most mutual funds are members of a group of mutual funds known as:
a. An investment trusts.
b. No-load funds.
c. A family of funds.
d. A dual purpose funds
2 Closed-end funds have lower cash requirements than open-end funds because:
a. Open-end funds allow investors to redeem their shares at any time.
b. Open-end funds pay more taxes than closed-end funds.
c. Open-end funds tend to invest in less liquid assets.
d. Closed-end funds have limited lifetimes.
3 Which type of fund invests in debt securities with very short maturities?
a. Money market mutual fund.
b. Bond fund.
c. Growth fund
d. Certified fund
4 Which type of fund is most likely to have the lowest management fee?
a. Equity growth fund.
b. Index fund.
c. Bond fund.
d. Equity income fund.
5 Shares of closed-end funds often sell:
a. At a discount to the net asset value.
b. Exactly at the net asset value.
c. At the net asset value, plus a load fee.
d. At a premium to the net asset value.
6 A mutual fund is a collection of ____________, owned by a group of investors.
a. Stocks and cash
b. Stocks, bonds, and other securities
c. Bonds
d. Interests accrued on a stock
7 A mutual fund is managed by __________.
a. The federal government
b. A credit union
c. A city manager
d. A professional investment company
8 Money market mutual funds
a. Enable individuals and small businesses to invest indirectly in money-market
instruments.
b. Are available only to high net-worth individuals.
c. Are involved in acquiring and placing mortgages.
d. Are also known as finance companies.
9 Mutual funds are essentially investment vehicles where people with similar investment
objective come together to pool their money and then invest accordingly.
(a)True
(b) False
10 Investment alternatives in India
a. Non Marketable Financial Assets
b. Equity Shares
c. Bonds
d. All of these
11 ………are the instruments that are considered as a relatively safer investment
avenues.
a. Equity Shares
b. Bonds
c. Money Market Instrument
d. Both (a) and (b)
12 These can be classified into following broad categories as per stock market:
a. Blue chip shares
b. Growth shares
c. GOI relief funds
d. Both (a) and (b)
13 A ……………are a trust that pools together the savings of a number of investors who
share a common financial goal.
a. T-Bills fund
b. Mutual Fund
c. Balanced Funds
d. None of these
14 A Mutual Fund is not a trust that pools the savings of a number of investors who
share a common financial goal.
(a)True
(b) False
15 Following are the features of Government Securities:
a. Issued at face value
b. No tax deducted at source
c. Can be held in Demat form.
d. All of these
16. Commercial real estate is defined as any real estate that is bigger than one house on
one lot.
(a)True
(b) False
17 …………is one of the most exciting types of commercial real estate.
a.
b.
c.
d.
Hotels and Resorts
Land development
Retail Centers
All of these
18 A venture capitalist (VC) invests in entities with a potential to register high growth.
(a)True
(b) False
19 A sudden demand by depositors for notes and coin is an example of:
a. Currency risk
b. Payment risk
c. Capital risk
d. Liquidity risk
20 Reinsurance' refers to the practice by insurance companies of:
a. Issuing new policies
b. Renewing existing policies
c. Insuring the same risk twice
d. Buying insurance from another firm
Answers for Self Assessment Questions
1. (c) 2.(a) 3.(a) 4.(b) 5.(d) 6.(b) 7.(d) 8.(a) 9.(a) 10.(d)
11.(b) 12.(d) 13.(b) 14.(b) 15.(d) 16.(a) 17.(b) 18.(a) 19.(d) 20.(d)
Chapter-10: Risk and Returns
Self Assessment Questions
1 A set of possible values that a random variable can assume and their associated
probabilities of occurrence are referred to as __________.
a. Probability distribution
b. The expected return
c. The standard deviation
d. Coefficient of variation
2 A statistical measure of the variability of a distribution around its mean is referred to as
__________.
a. A probability distribution
b. The expected return
c. The standard deviation
d. Coefficient of variation
3 The ratio of the standard deviation of a distribution to the mean of that distribution is
referred to as __________.
a. A probability distribution
b. The expected return
c. The standard deviation
d. Coefficient of variation
4 The weighted average of possible returns, with the weights being the probabilities of
occurrence is referred to as __________.
a. A probability distribution
b. The expected return
c. The standard deviation
d. Coefficient of variation
5 The __________ describes the linear relationship between expected rates of return for
individual securities (or portfolios) and __________.
a. Characteristic line; standard deviation
b. Characteristic line; beta
c. Security market line; standard deviation
d. Security market line; beta
6 Which of the following items describes an index measure of systematic risk?
a. Beta
b. Standard deviation.
c. Coefficient of variation.
d. Variance.
7 The tax form or forms used to file income taxes with the internal revenue service (IRS).
(a)True
(b) False
8 This type of risk is avoidable through proper diversification.
a. Portfolio risk
b. Systematic risk
c. Unsystematic risk
d. Total risk
9 The risk-free security has a beta equal to
is equal to
.
a. One; more than one.
b. One; less than one.
c. Zero; one
d. Less than zero; more than zero.
, while the market portfolio's beta
10 Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than
the gamble's expected value. Carrie shows
a. Risk aversion
b. Risk preference
c. Risk indifference
d. A strange outlook on life
11 According to the security market line, the expected return of any security is a function
of:
a. Unsystematic risk
b. Diversifiable risk
c. Unique risk
d. Systematic risk
12 According to the capital market line, the expected return of any efficient portfolio is a
function of:
a. Systematic risk
b. Total risk
c. Unique risk
d. Beta
13 The market risk is further classified into following types.
a. Absolute risk.
b. Relative risk.
c. Directional risk.
d. All of these
14 In contrast to the CAPM, the arbitrage pricing theory :( CFA related question)
a. uses risk premiums based on micro-variables
b. assumes that investors are risk averse
c. does not require the restrictive assumptions of the market portfolio
d. identifies important factors that determine expected returns
15 Which of the following statements is true according to the theory of arbitrage?
a. Rational investors will arbitrage in a manner consistent with their risk tolerance.
b. High-beta stocks are consistently underpriced
c. Positive alpha stocks will quickly disappear
d. Negative alpha stocks cannot be arbitraged
16 Operational risks are the business process risks failing due to human errors.
(a)True
(b) False
17 The operational risk is further classified into following types:
a. Model risk.
b. People risk.
c. Legal risk.
d. All of these
18 Beta measures:
a. The total risk of a stock
b. The total unsystematic risk of a stock
c. The systematic risk of a stock
d. The total risk of the market
19 An investor's required rate of return equals
a. Risk premium – Risk free rate
b. Return on market – Risk free rate
c. Risk premium
d. Risk free rate + Risk premium
20 Risk Management covers different types of risk in a corporate enterprise pertaining to
market, credit, liquidity, event or operations.
(a)True
(b) False
Answers for Self Assessment Questions
1. (a) 2.(c)
3.(d) 4.(b) 5.(d) 6.(a) 7.(a) 8.(c)
11.(d) 12.(b) 13.(d) 14.(c) 15.(c) 16.(a) 17.(d) 18.(c)
9.(c)
10.(a)
19.(d) 20.(a)